Bull market turns 4, but can it make it to 5?

Mar. 10, 2013
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A trader reacts by the end of trade at the New York Stock Exchange on March 5, 2013. The Dow Jones industrial average closed at 14253.77 points topping the previous record high of 14,164 achieved on October 9, 2007. / Emmanuel Dunand, AFP/Getty Images

by Adam Shell, USA TODAY

by Adam Shell, USA TODAY

NEW YORK - The money-minting Wall Street bull, which celebrated its fourth birthday Saturday, kicks off its fifth year Monday trading at a record high.

Not to be a party pooper, but it's prudent to point out that no bull market -- no matter how profitable, popular or seemingly healthy -- lives forever.

Bulls tend to lead far shorter lives, on average, than cats and dogs, your 30-year mortgage, the neighbor next door, Boeing's 747 and the clothes dryer that always seems to go cold when you can least afford it.

The average lifespan of a bull market is 56 months, as in four years and eight months. Put another way, most bulls don't make it to their fifth birthdays, according to S&P Dow Jones Indices.

The purpose of this life-expectancy lecture is to drive home the point that this bull, which was born after stocks bottomed on March 9, 2009, and which the Federal Reserve has repeatedly injected with a performance-enhancing and life-sustaining drug called cheap money, is showing a touch of gray around the horns and entering its Golden Years.

Stock investors already in the market, or those on the sidelines thinking of getting in now that the Dow is posting hard-to-ignore gains, need to keep their fingers on the aging bull's pulse to make sure their portfolios don't suffer big losses when the bull eventually dies.

For now, Wall Street investment strategists are acting like insurance actuaries, inputting historical bull market data into spreadsheets in an effort to figure out how much more upside is left. The Dow Jones industrial average has enjoyed a gain of 120% -- 7,850 points -- since its low four years ago, and is trading just below 14,400, a level never seen before.

Optimists view the bull's vital signs as healthy. But skeptics say the prognosis is more dire.

"The bull is on borrowed time," says Patrick Adams, portfolio manager at PVG Asset Management. Using a baseball analogy, he adds: "We are in the ninth inning and hoping for extra innings."

Adams' bearish bent is based on the belief held by many bears that the stock market and economy have been manipulated and artificially inflated by the Fed's ultra-accommodative monetary policy. His concern is that once the Fed stops buying bonds and injecting the market with cheap cash, interest rates, currently near record lows, will rise, and the economy won't be able to sustain its wobbly, yet improving growth rate.

"At some point," says Adams, "the Fed, which has printed an extreme amount of money, will run out of ink."

Calls for the bull's demise are premature, counters Kevin Pleines, an investment strategist at Birinyi Associates.

"There is no reason why it has to end," he says. "We are seeing good things in the market."

Pleines' bullish outlook is based largely on the fact that improving economic data, including Friday's upbeat February jobs report and stronger recent readings on consumer sentiment, manufacturing and auto and home sales, suggest the economy is "slowly getting better."

He also notes that just because the Standard & Poor's 500 index has gone more than 520 days without a 10% drop, or correction, it doesn't necessarily mean a steep drop is looming, as many analysts warn. In the 1990 bull market, stocks rose for 2,553 days before suffering a correction, Pleines says. Similarly, after a correction early in the 2002 bull, the market went another 1,673 days without falling 10%.

History says that just because the average bull's lifespan is roughly 4½ years doesn't mean the current run can't last longer. Of the S&P 500's 11 bull markets since World War II, five were still around when they turned five, according to S&P Capital IQ. The bulls that lasted that long, posted average gains in Year Five of 21%. That tops all prior years except for Year One, which sports gains of 38%.

The past two bulls ran longer than average. The 2002-2007 bull lasted five years. The decade-long bull that ended in March 2000, the longest bull in history, lasted 113 months, or more than nine years. It was also the biggest-gainer of all-time, posting a return of 417%, more than double the 162% average gain since 1932.

The current bull, which has climbed 128%, is sixth best of all time, says S&P Dow Jones Indices.

The most common causes of death for bull markets are well-known.

Overvaluation, for example, is akin to cardiac arrest. When stocks get wildly overpriced, it often means the market is ripe for a fall. An example of this is 2000, when many fledgling Internet companies with no profits and untested business models were selling at triple-digit price-to-earnings ratios.

Other bull-killers include economic contractions, such as the sharp downturn during the Great Recession, which lasted from June 2007 through December 2008. Sharp jumps in interest rates due to central bank monetary tightening have also been known to cause stocks to fall. So, too, have unexpected events with shock value, known as "black swans," which scare investors silly. The bankruptcy filing of Wall Street titan Lehman Bros. in fall 2008 is a good example.

Politicians who get policy wrong, losing the confidence of investors, can also rattle markets. U.S. lawmakers did that in the summer of 2011, when they squabbled so long about extending the debt ceiling that a rating agency lost patience and downgraded the USA's AAA-credit rating, causing stocks to swoon.

What are the stock market's vital signs telling us now?

John Manley, chief equity strategist at Wells Fargo Advantage Funds, says the bull is fit enough to live at least another year.

"The bull will be fine," says Manley. Working in the bull's favor, he argues, is the fact that the "world didn't fall apart" during the 2008-09 financial crisis, so it doesn't make a lot of financial sense to "price the market for disaster."

On the question of valuations, the market P-E ratio is far from irrationally exuberant. The market is trading at roughly 15 times last year's earnings, which is lower than the average P-E of 18.8 since 1998. It's also below the peak P-Es in the last five bull markets, LPL Financial says.

Investor sentiment is also far from euphoric. The latest poll by the American Association of Individual Investors found only 31% bullish. That's below the long-term average of 39%. It's also fewer than the 55% bulls near the 2007 top and 66% at the 2000 peak.

Despite anemic economic growth of 0.1% in the fourth quarter of 2012, incoming data suggest growth was skewed to the downside by uncertainty surrounding the debate about coming tax increases and spending cuts, known as the fiscal cliff.

But that no-growth period appears temporary. After better-than-expected data this month on construction spending, vehicle sales, factory orders, inventory accumulations by businesses and job growth, Barclays has raised its estimate for first-quarter U.S. growth to 1.9% from 1.3%. That means a recession is unlikely, at least for now.

If the peppier growth continues, it will boost corporate earnings, a key stock driver. Earnings for the fourth quarter of 2012 grew 7.7%, vs. a year ago, far better than the 3.4% rate economists were predicting on Jan. 2, S&P Capital IQ says. Profit growth estimates for the current quarter have dipped to 0.6%, down from 3.7% on Jan. 2. Analysts have also trimmed projections for the second and third quarters of 2013.

There's also $10 trillion in cash sitting on the sidelines in bank accounts, money markets and certificates of deposit, which provides the market with a lot of potential buying firepower.

"Sitting on the sidelines earning 0% on your money is not as safe as it sounds," says Sandler, noting that inflation eats away at principal.

"Looking at those facts," says Manley, "I conclude that the market is still attractive, not overvalued, nor is it reflecting too much optimism."

But that doesn't mean there aren't looming risks. The stock market is vulnerable to the Fed ending its easy-money policies earlier than investors anticipate, says JJ Kinahan, chief derivatives strategist at TD Ameritrade.

Fed policy has become such a crutch for investors that the mere mention of the Fed transitioning to a tightening bias rattles investors. The Fed's decision to flood markets with cash could also cause a harmful jump in inflation.

"For years, investors felt the Fed will always be there to save the market," says Kinahan. "The Fed's exit could definitely kill the bull off if it is not a graceful one and interest rates rise too fast." Higher rates could hurt corporate profits, housing, and make borrowing and paying off debt more more costly for individuals, businesses and the government.

Politicians could also harm the bull, especially if policy makers in the U.S. and Europe don't make the right moves to reduce the massive debt load that's choking economic growth, adds Adams.

"The U.S. economy is akin to a thoroughbred race horse," says Adams. "Right now, the economy has a 500-pound jockey on its back."

The Fed's current policy is also blowing up bubbles in the bond, stock and housing markets, warns Michael Pento, president of Pento Portfolio Strategies. While it's unlikely these bubbles will burst this year, next year or in 2015, primarily because the Fed is unlikely to shift its policy in that time period, it will end badly, likely in 2016, says Pento.

"Barring an attack on Iran by Israel, which would send the price of a oil skyrocketing to $175 a barrel, I believe the bull market will last a few more years before a protracted decline," Pento says. "The Fed is the only game in town, but with economic growth around 1% to 2%, the Fed won't be able to move to raise interest rates for a few more years."

No doubt, the stock market next year is likely to keep investors on their toes, says Joe Kringdon, head of U.S. retail distribution at Pioneer Investments.

"Most people can't afford not to be in stocks," he says. "It won't be a smooth ride. But over a long time frame, I'd say you want to own stocks."

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